Tuesday 21 July 2009 13.14 EDT
First published on Tuesday 21 July 2009 13.14 EDT

Two of the UK's biggest food and fashion retailers today shrugged off the recession, rushing out announcements that they are on course to turn in better than expected profits this year.

Morrisons, the UK's fourth biggest supermarket chain, and Next, the second biggest fashion chain, expect to rake in a combined £100m more than City analysts had forecast.

The Bradford-based grocer said its best-in-class performance was a result of pulling in half a million more customers every week than it did a year ago, as well as its existing shoppers spending more. Next said its success was due to the recent warm weather and better fashions.

The encouraging update from Morrisons sent its shares sharply higher. The grocer was the biggest riser in the FTSE100, adding 8% to close at 274p. Next fell back slightly, down 1.5% at £16.18, but its shares are up 13% in the last month. Morrisons was the biggest riser in the FTSE100.

The grocer's sales had been expected to dip after hitting a market-leading 8.2% in its first quarter, but they have held up strongly and margins are up 0.4 percentage points, helped by the grocer hitting volume targets that trigger payments from several big suppliers. The margin improvement will deliver £50m to the bottom line and another £20m will come from higher-than-forecast cost savings. Analysts increased their profits forecast from £664m for the full year to £740m.

Morrisons got another boost from data produced by market research group TNS Worldpanel, which showed the grocer's sales 9.5% ahead on a year ago. That growth was markedly higher than Tesco (5.7%), Sainsbury's (7.7%) and Asda (8.1%).

The grocer said its continuing sales growth was a result of its "fresh offering, keen positioning on price and promotions and its industry-leading service and availability." It has also benefited from a TV ad campaign which has used a series of celebrities including most recently the actor Robert Lindsay.

Next said it now expected to make £30m more this year, and analysts raised their forecasts to £400m-410m. Some £15m of the improvement is the result of the sunny summer driving sales in the first half.

Like-for-like sales in the six months to July 18 were down 1.9%, compared with the 4-7% decline the company had predicted in May. Mail order sales through the Next Directory were up 1.1%, compared with Next's forecast of zero growth. The retailer said the warm weather had boosted store sales by 2-3% and it had put nearly 20% less stock into its summer sale.

In the second half, profits are again expected to be £15m more than expected as anticipated import cost increases fail to come through. Next had repeatedly warned prices would have to rise this autumn as a result of the weaker pound. "It hasn't worked out as badly as we thought it might," said the chief executive, Simon Wolfson. He said the retailer had negotiated better prices from suppliers with empty factory capacity and had moved some sourcing from China to cheaper countries. "There will be some price increases but the vast majority of prices will be the same," he said.

Wolfson also said he would spend a further £10m on expansion this year, including 13 new home-only stores, taking the total to 20.

Nick Bubb, retail analyst at Pali International, said the profit upgrades were a welcome surprise: "The green shoots (of economic recovery) are alive and well. It will take a hurricane in the autumn to blow them over."

Wolfson said he remained cautious, expecting consumers to save the benefits of lower mortgage costs, rather than spend in the shops. With unemployment rising, the Next boss said he expected no pick-up this year and warned of a "long and shallow" recession, adding "any growth next year will be anaemic at best".Analyst Sam Hart at Charles Stanley, who is urging investors to buy Next shares, said the fashion chain "is proving to be among the most resilient retailers in the current downturn. It is one of the best managed companies in the sector, has a sound balance sheet and is highly cash generative."

He also praised Morrisons' "industry-leading sales momentum and superior forecast earnings growth".Tony Shiret at Credit Suisse said he regarded Next as "a continuing safer company than its peers" and rates the shares as "outperform", while Matthew McEachran at Singer "we see scope for further out-performance later in the year".